Millennials Mired in Wealth Gap as Older Americans Gain: Economy

Homeownership rates for 35 to 44 year olds dropped 6.3 percentage points to 60.9 percent as of the fourth quarter 2013 from the end of 2007, Census data show. Photographer: David Paul Morris/Bloomberg

March 31 (Bloomberg) -- The damage inflicted on U.S.
households by the collapse of the housing market and recession
wasn’t evenly distributed. Just ask Jason and Jessica Alinen.

The couple, who live near Seattle, declared bankruptcy in
2011 when the value of the house they then owned plunged to less
than $200,000 from the $349,000 they paid for it four years
earlier, just as the economic slump was about to start. Jason
even stopped getting haircuts to save money.

“We thought we’d have a white picket fence, two kids, two
dogs, and we’d have $100,000 in equity,” said Jason, 33, who
does have two children. “It’s just really frustrating.”

For households headed by someone 40 years old or younger,
wealth adjusted for inflation remains 30 percent below 2007
levels on average, according to research by economists at the
Federal Reserve Bank of St. Louis. Net worth for older Americans
has already recouped the losses.

Such a generational divide has negative implications for
consumer spending, which accounts for almost 70 percent of the
economy. Younger households tend to spend a greater share of
their incomes in furnishing new homes and buying automobiles, in
contrast to their older counterparts who save more as they inch
closer to retirement.

“These changes going on with individual balance sheets
could have impacts on the whole economy,” said William Emmons,
an economist at the St. Louis Fed who co-authored the study
published in February with Bryan Noeth. “Maybe this is one of
the reasons that it’s been so hard to understand this weak
recovery. Not enough people are looking at these.”

More Exposed

Young families were more exposed to the real-estate slump
because homes represented a larger share of their wealth before
the crisis, much of it financed with debt, according to Emmons
and Noeth. As property values plummeted and jobs dried up, many
found they were unable to make loan payments, so, like the
Alinens, they deleveraged or faced foreclosure.

Homeownership rates for 35 to 44 year olds dropped 6.3
percentage points to 60.9 percent as of the fourth quarter 2013
from the end of 2007, Census data show. For households under 35,
the rate dropped 4.2 points to 36.8 percent. Meanwhile, 71.3
percent of 45 to 54 year olds and 77 percent of those 55 to 64
own a home.

The average value of housing on young families’ balance
sheets remains about 35 percent below its 2007 level, the St.
Louis Fed paper estimates.

Impact on Spending

The collapse in housing wealth accounted for about 40
percent of the shortfall in consumer spending between 2006 and
2009 relative to its previous trend, Princeton University’s Atif
Mian found in a June 2013 paper. The current rebound in home
prices won’t provide the same positive impact on spending it
once did through what economists call the wealth effect,
according to Mian.

“The types of homeowners that would normally spend out of
their housing wealth are no longer homeowners,” Mian and the
University of Chicago’s Amir Sufi wrote in a March 7 blog post.
“The ‘housing as an ATM’ channel is not nearly as strong as it
was from 2002 to 2006.”

Families headed by 25 to 44 year olds accounted for 35.3
percent of all consumer spending in 2012, according to data from
Consumer Expenditure Survey. Those led by someone older than 65
accounted for 17.1 percent of all purchases.

“The fact that their wealth levels are down, that they’re
less likely to own homes, that they’re not even comfortable
setting up their own households as renters, that has
consequences,” said Richard Fry, a researcher at Pew Charitable
Trusts in Washington, referring to younger households. “They’re
not buying cable packages, they’re not buying mops and brooms
from Home Depot.”

Missing Rebound

With fewer young people owning homes, not as many are
benefiting from the rebound in home prices, Fry said.

“I am concerned that the decline in home ownership is
secluding Millennials from building wealth, at least in the
traditional American way,” Fry said. “There’s at least a
warning flag out there.”

Household wealth for those under 40 remains below 1989
levels, according to the St. Louis Fed paper.

The disparity goes beyond housing. Younger households’
incomes declined sharply in the recession and the rebound has
been plodding. For young American families at the middle of the
income scale, earnings were down 2.3 percent as of 2010 from the
1992 to 1995 average, based on a St. Louis Fed study from 2012.
Families overall saw a 9.4 percent increase in the period.

Worse Recession

“Young adults had a worse recession than older adults
did,” said Jed Kolko, chief economist at real estate website
Trulia.com. “Even though young adults have been going back to
work in the past year, they’re still much less likely to be
employed than they were before the recession.”

What’s more, heads of households under age 40 aren’t
benefiting as much from a boom in equity prices, which have hit
record highs this year. About 27 percent of 18 to 29 year olds
owned stocks as of April 2013, compared to 61 percent of 50 to
64 year olds, a Gallup poll found.

The outlook isn’t all negative. Households headed by
younger people have made progress paying down their overall debt
since the crisis, said Emmons, the St. Louis Fed economist.
Between 2007 and the third quarter of 2013, the group’s average
total debt declined 23.7 percent, Emmons estimates, while that
for 40 to 61 year olds dropped 10.2 percent.

“There’s been more deleveraging, more shedding of debt by
younger families, which is actually a positive in terms of their
net worth,” Emmons said.

Financially Healthy

Joe Carson, director of global economic research at
AllianceBernstein LP in New York, said even if younger
households haven’t rebuilt their wealth to pre-recession levels,
it doesn’t mean they aren’t financially healthy and ready to
spend.

“Many people thought that was an artificial peak to begin
with given overvalued housing,” Carson said. “To even be
coming close to that is, to me, a bullish signal.”

That said, young families burned by loan defaults and
foreclosures during the housing crash may lack the access to
credit they need to buy houses and purchase other items, so
their frugality may not soon end.

Plus, America’s youngest adults have continued to take on a
different type of debt: borrowing for education. Among
households with installment debt, those younger than 35 held
about 66 percent of it in student loans, compared to 36.1
percent for those 45 to 54, based on the Federal Reserve’s 2010
Survey of Consumer Finances. That could stall purchases from
autos to homes.

Student Loans

“Tight credit standards and student-loan debt has had a
dampening effect on the entry-level buyer,” said Martin Connor,
chief financial officer at luxury homebuilder Toll Brothers Inc.
during a March 3 presentation.

The Alinens, who work with a credit counselor, moved to a
less expensive house to escape their under-water mortgage and
went through bankruptcy. They’re now struggling to keep their
current place and have had their monthly payment modified,
partly because Jason lost a job in 2012 and is now making less
than he’d expected to earn. The $100 reduction isn’t enough to
help much, he said.

Damage from a cracked pipe in their new home added more
than $40,000 worth of repairs to their burden. For them, a
return to the old pattern of wealth building and consumerism is
far off, and Jason Alinen said it’s more likely the family will
end up renting.

“We work full-time jobs, we see our kids for two hours a
day,” he said. “It’s just not like these people a decade
ago.”